US citizens renouncing because of tax laws affecting Australian superannuation

By Julie Power

September 10, 2016 — 6.02pm

Most Americans would rather die than surrender their passports, but when Brisbane academic Karen Alpert renounced her US citizenship in Sydney with her husband and daughter she was angry.

The Californian who migrated to Australia 20 years ago wasn't quitting because of the prospect of Republican candidate Donald Trump, although she does predict others may quit too if he is elected President.

Karen and Frank Alpert gave up their American citizenship in June this year. They became Australian citizens 17 years ago after falling in love with Australia. Credit:Robert Shakespeare

Like thousands of Americans who are now giving up their citizenship, the Alperts were protesting at United States tax policy. Other than Eritrea, it is the only country in the world that taxes non-resident citizens – and even holders of a Green Card (alien resident permit) who are also living outside the USA – on their worldwide income, regardless of where it is earned or where they live.

This requires the estimated 200,000 Americans who live in Australia, many of whom are dual citizens, to file an annual tax return in both countries. Compliance is cumbersome: the American tax code is 74,608 pages compared with Australia's 3657 pages. Many dual citizens who live in Australia claim the American treatment of Australian superannuation means they are effectively being taxed twice.

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Until the introduction of the 2010 Foreign Account Tax Compliance Act or FATCA, the US government had no way of uncovering the earnings of the eight million Americans who live abroad. And most expatriates were unaware that they were required to file annual tax returns in both countries.

That's changed. Now about 192 countries, including Australia, have agreed to FATCA, which obliges all banks and financial institutions to provide details of every American citizen's bank balance and earnings. If the banks don't oblige, they can be banned from operating in the US.

Because of FATCA more than 4500 US citizens gave up their citizenship last year, compared with 231 in the year before it was introduced. Eduardo Saverin, co-founder of Facebook, gave up his citizenship a few years ago, and others including the former mayor of London Boris Johnson – who was born in the US – have also threatened to quit in protest at the US tax policies.

Experts from Moodys Gartner tax law firm, who recently toured Australia to provide advice to dual citizens, warn renouncing has to be done carefully, otherwise saying goodbye can attract a hefty exit tax. Even worse, the 1996 Reed Amendment threatens to put anyone who quits for the "primary purpose of avoiding US tax" on the inadmissable list – barred from ever re-entering – with child abductors, Nazis, drug traffickers and terrorists.

According to former US ambassador Niels Marquardt, who is now CEO of the American Chamber of Commerce in Australia, most Americans would rather die than give up their US passports.

"But people are being forced to do so by the dire financial circumstances of not doing so."

In his 30 years with the US State Department, the issue of renouncing rarely came up. But now many people, often very emotionally, US nationals often admitted that they were considering it. Mr Marquardt says the chamber is pushing for reforms to the US Australia tax treaty, which was signed in 2001, because it overlooked the issue of superannuation.

The Internal Revenue Service in the United States treats increases in the value of superannuation as income, said Mr Marquardt. "There are all kinds of anomalies, and you can be pretty well wiped out if you aren't careful."

American Citizens Abroad, which represents expatriate Americans, has also been lobbying the US to move from a worldwide approach to a residential approach, similar to Australia's tax system.

FATCA – described as a "global witch hunt" by Forbes Magazine – has been blamed for breaking up marriages and dividing families – spouses feel isolated and vulnerable when funds are transferred to their non-American partners to avoid taxes, for example. Comments like this are common: "My German ex refused to marry an American because of filing requirements. So we split up."

When the Alperts moved to Australia with their two children in 1995, it felt like home and it was safe.

When Dr Alpert became an Australian citizen in 1999, she felt it should "end the United States' claim on us" and she stopped filing her US tax returns.

In all, ceding her citizenship took 17 years, cost more than $70,000 in fees and professional advice, including the $2300 per person cost of relinquishing compared with Australia's $230 fee, and was complicated. Other dual citizens are trapped, she says, and unable to quit the US because of other restrictions relating to income.

"No other country requires its residents to jump through these sorts of hoops, and makes you pay so much money to leave," she said.

"I didn't give up for tax," Dr Alpert stressed, "I gave up because of the compliance and control."

She is also angry about the invasion of privacy. In the USA, a bank would require a court order to breach privacy rules by obtaining information on an individual's bank balance and earnings without cause. In Australia, some banks have refused to open accounts for US citizens because of the additional paperwork and risk involved.

Dr Alpert and the American Chamber of Commerce in Australia is now lobbying the government to overhaul the US/Australia tax treaty.

"The current status of superannuation accounts held by Australian resident US taxpayers (most of whom are Australian citizens) is unclear."

She says the US tax on Australian superannuation is contrary to the interests of Australia: "It reduces the ability of Australians to save to fund their retirement and increases the probability that the affected Australian citizens will be reliant on the Australian government for Age Pension once they retire."